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Examples Of Price Skimming

Examples of Price Skimming  Assignment / Homework Help
An example of price skimming is DVD players. Initially in 1990s when DVD players were launched the price of a DVD player was $500 and $400. By 2001 the prices were skimmed to less than a $100. By 2004 DVD players were available for as low as $50 or $60.

Another example can be picked up from the computer industry where technology plays a significant role in price skimming. When a new laptop is introduced with enhanced and unique features it is priced quite high. The prices of older laptops now fall as the demand shifts to laptops showcasing new technology.

Advantages of Price Skimming

  • Price skimming helps in recovering the sunk costs. Sunk costs are costs incurred in past which cannot be recovered. When a new and innovative product is launched its research and development costs are usually high. Similarly a lot of promotion via advertising etc. is required for its introduction to the market. The initial hike in price helps in recovering some of these expenses.

  • Price skimming helps in segmenting the market. The price can be lowered to suit each segment and thereby the demand of each segment is satisfied and the manufacturer makes maximum profit from each of them.

  • The high price of the product brings huge benefits for the dealers as well. Since the prices are high initially the manufacturer has the liberty of lowering it when competitors knock at the door.

  • If the product is positioned well then its buyers are more prestige conscious than price conscious. Expensive goods easily attain the tag of being luxury items.

Disadvantages of Price Skimming
  • This policy is workable only when the product has an inelastic demand curve. For instance, price changes have no effect on the demand for a life saving drug. The price may $100 or $50 people will buy it. If in the long run demand curve turns elastic then market equilibrium will be attained by quantity changes instead of price changes.

  • It is difficult to maintain the stock for skimmed products. It isn’t an easy proposition for the distribution chain. Retailers may ask for higher profit margins to continue distribution of products.

  • Skimming attracts competitors. The high margins compel them to enter the market as soon as possible.

  • The rate of diffusion is slow for skimmed products. The competitors take advantage of this situation. They either turn copy cats and come out with similar cheaper products or go one step further and introduce a similar product with enhanced features.

  • Lowering of price should be done at an appropriate time. If lowered too soon the early customers feel cheated. They feel waiting for some more time before buying the product would have helped them strike a profitable deal. As a result the company and its brand name suffer.

  • Inefficiency may creep into the firm. Due to high margins less effort is made to keep a check on the costs.

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